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Kayak's Acquisition Shows IPOs Can be Profitable

Many investors believe that you shouldn't buy an IPO on the first day of trading. Frequently, hype around the public offering leads to outrageously priced shares that inevitably come crashing back to Earth within only a few months.

Waiting to buy a new company -- at least a year -- after the initial public offering has proven to be prudent advice in many situations.

Lots of recent IPOs have failed to deliver. Most notably, Groupon (NASDAQ: GRPN), which set a new low on Friday following a disappointing earnings report. Shares traded as high as $31 before plunging to their current value, less than $3 per share.

Facebook's (NASDAQ: FB) performance has not been as bad, but its slide dominated the financial news for much of 2012. After pricing at $38, Facebook has lost almost half of its value in only a few months, trading down below $20 per share.

Pandora (NASDAQ: P) and Zynga (NASDAQ: ZNGA) have stumbled as well, with Zynga's performance being so bad as to prompt rumors that the company could be taken private.

But that trend was shattered Thursday after-hours when online travel company Kayak (NASDAQ: KYAK) announced an agreement with priceline.com (NASDAQ: PCLN) to be acquired for $40 per share. Shareholders who took a stake when Kayak went public in July may have profited massively, while those who managed to get shares at the IPO price of $26 saw a return of over 50 percent in only a few months.

While Kayak shareholders might have been pleasantly surprised Friday, holders of other travel companies might have become concerned early in the session. Shares of Expedia (NASDAQ: EXPE) and TripAdvisor (NASDAQ: TRIP) initially traded almost two percent lower, but bounced higher as the broader market rallied.

For its part, Priceline.com has an been interesting stock. Shares have rallied strongly higher over the past two years, but have come down significantly since the spring. At one point earlier this year, shares were slightly above $750, but have come back down to near $600.

So, should investors buy into the next hot IPO on expectations of a takeover? Certainly not. Kayak's takeover was unusual, although it was definitely a pleasant surprise for those holding shares.

But it does go to show that it can be profitable to buy IPOs -- sometimes.